Did a Chapter 7 discharge eliminate a sole proprietor's New Mexico gross receipts tax debt when he did not prove timely returns or the federal timing requirements?

Plain-English summary

A Chapter 7 discharge order did not establish that General Design and Construct's gross receipts tax debt was discharged because the sole proprietor supplied no evidence of timely returns or the federal timing requirements. The AHO upheld $7,175.04 tax, $1,435.01 penalty, and $997.43 interest after a separate prehearing abatement.

Rick Garduno operated General Design and Construct as a sole proprietorship. A federal Schedule C mismatch showed business income that had not been reported on New Mexico CRS-1 returns for 2009 through 2012.

The Department initially assessed $10,435.65 tax, $2,087.13 penalty, and $1,589.57 interest. Before the hearing, it allowed part of the claimed NTTC relief and reduced the outstanding balance to $9,607.48.

The NTTC claim was abandoned

Garduno's written protest challenged the assessment based on NTTC acceptance. At the hearing, however, he presented no evidence or argument on the certificate issues and relied solely on a 2014 bankruptcy discharge order.

The assessment was presumed correct, and unsubstantiated statements could not overcome it. By abandoning the issue and presenting no supporting record, the taxpayer left the remaining assessment intact without a merits ruling on the underlying NTTC details.

The bankruptcy record did not prove discharge

The bankruptcy issue had not been stated in the protest letter, but the AHO addressed it because the Department was prepared to respond.

Section 727(b) generally discharged pre-order debts subject to Section 523 exceptions. The decision identified two possible tax exceptions: gross-receipts taxes within the timing rules cross-referenced in Section 507(a)(8), and taxes for which no return or a late return was filed.

Garduno provided no bankruptcy petition date or evidence addressing the statutory time periods. He also did not establish that any relevant CRS-1 return was timely filed. The assessment's reach back to 2009 was consistent with New Mexico's seven-year assessment period for nonfilers.

Under the Tenth Circuit's Mallo decision and the record presented, the AHO found no basis to conclude that the gross receipts tax debt had been discharged.

Result: protest DENIED. The $9,607.48 hearing-date balance remained, with interest continuing until the principal was paid.

What this means for you

Sole proprietors in bankruptcy

A general discharge order does not by itself establish the treatment of every tax debt. Preserve petition dates, return filing dates, due dates, assessments, and the specific bankruptcy schedule and order.

Businesses protesting a tax assessment

Present evidence for every ground in the protest. If you abandon an NTTC or deduction theory at the hearing, the assessment presumption can decide that issue without further analysis.

Accountants and bankruptcy counsel

Coordinate the state-tax and bankruptcy records. The taxpayer here failed because the hearing record did not establish the federal exception timelines or timely state returns.

Common questions

Q: Did the Department allow any NTTC relief?
A: Yes. It made a prehearing abatement that reduced the tax from $10,435.65 to $7,175.04, but the remaining certificate argument was abandoned.

Q: Was bankruptcy mentioned in the original protest?
A: No. The AHO nevertheless addressed it because the Department was ready to argue the issue.

Q: Did the decision hold that all gross receipts tax always survives bankruptcy?
A: No. It held that this taxpayer did not prove the relevant federal timing facts or timely returns needed to show discharge.

Q: Why did return filing matter?
A: The decision applied the federal exception for tax debts when no return or a late return was filed and found no evidence that Garduno filed timely CRS-1 returns.

Q: What balance remained?
A: $7,175.04 tax, $1,435.01 penalty, and $997.43 interest as of the hearing, totaling $9,607.48.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-18(C) — seven-year assessment period for nonfilers
• NMSA 1978, § 7-1-67 — continuing interest
• 11 U.S.C. §§ 523(a)(1), 507(a)(8), and 727(b) — bankruptcy discharge and tax exceptions
• Regulation 3.1.7.12(A) NMAC — protest grounds

Cases cited:

• Mallo v. IRS (In re Mallo), 774 F.3d 1313 (10th Cir. 2014) — bankruptcy treatment of tax debts tied to late or missing returns
• New Mexico Taxation and Revenue Department v. Casias Trucking, 2014-NMCA-099 — evidence required to overcome an assessment
• MPC LTD. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — unsubstantiated statements do not overcome the presumption
• Archuleta v. O'Cheskey, 1972-NMCA-165 — assessment presumption and taxpayer burden

Source

• Listing: New Mexico Decisions & Orders
• Decision post: General Design and Construct
• Decision PDF: D&O 16-32

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
GENERAL DESIGN AND CONSTRUCT No. 16-32
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0208589360

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on April 25, 2016 before Brian

VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Rick Garduno appeared for

General Design & Construct (“Taxpayer”). Staff Attorney Peter Breen appeared representing the

State of New Mexico Taxation and Revenue Department (“Department”). Protest Auditor

Nicholas Pacheco appeared as a witness for the Department. Taxpayer Exhibit #1 and

Department Exhibit A were admitted into the record. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On January 14, 2016, under letter id. no. L0208589360, the Department assessed

Taxpayer for $10,435.65 in gross receipts tax, $2,087.13 in penalty, and $1,589.57 in interest for

the CRS reporting periods between January 1, 2009 and December 31, 2012.

2. On February 12, 2016, Taxpayer protested the Department’s assessment.

Although Taxpayer made arguments related to acceptance of NTTCs in its protest letter, at the

protest hearing Taxpayer abandoned those arguments in favor of an argument related to

bankruptcy, an issue not raised or identified in the protest letter.

3. On February 19, 2016, the Department’s protest office acknowledged receipt of a

valid protest.

4. On March 30, 2016, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

5. On April 4, 2016, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on April 25, 2016, within 90-

days of the Department’s acknowledgment of receipt of a valid protest.

6. Taxpayer was a sole proprietor operated by Rick Garduno.

7. There is no evidence that Taxpayer timely filed CRS-1 returns for any of the

relevant periods.

8. At some unspecified point in 2013, Rick Garduno and his wife Debbie filed a

petition for bankruptcy.

9. On January 24, 2014, the United States Bankruptcy Court issued an order

discharging debt under section 727 of title 11 of the United States Code. The back of the order

clearly stated that the order generally did not discharge most tax debt. [Taxpayer Ex. #1].

10. Through its Schedule C mismatch program with the IRS, the Department detected

that Taxpayer had unreported more gross receipts business income on its Federal Schedule C not

reported as New Mexico gross receipts on a CRS-1 return.

11. As a result of the Schedule C mismatch, the Department issued its January 14,

2016 described in finding of fact #1.

12. Before the scheduled hearing, the Department made an abatement of the assessed

tax based on Taxpayer’s presentation of a NTTC.

13. As of the date of hearing, and reflecting the Department’s prehearing abatement,

Taxpayer still owed $7,175.04 in tax, $1,435.01 in penalty, and $997.43 in interest for a total

outstanding balance of $9,607.48. [Dept. Ex. A].

In the Matter of the Protest of General Design and Construct, page 2 of 7
DISCUSSION

Although Taxpayer’s protest letter related to claims for deductions requiring presentation

of NTTCs, at hearing Taxpayer’s sole evidence and argument related to his 2014 bankruptcy

discharge order. In light of the bankruptcy discharge, Taxpayer argued that he was not liable for

the assessed tax. The Department responded that under a case from the 10th Circuit, Mallo v. IRS

(In re Mallo), 774 F.3d 1313 (10th Cir. 2014), Taxpayer was still liable for the assessed tax debt.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Accordingly, it is Taxpayer’s

burden to present some countervailing evidence or legal argument to show that he is entitled to

an abatement, in full or in part, of the assessment issued against him. See N.M. Taxation &

Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight). “Unsubstantiated statements that the assessment is incorrect cannot

overcome the presumption of correctness." See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003

NMCA 21, ¶13, 133 N.M. 217; See also Regulation 3.1.6.12 NMAC. When a taxpayer presents

sufficient evidence to rebut the presumption, the burden shifts to the Department to show that the

assessment is correct. See MPC Ltd., 2003 NMCA 21, ¶13.

In the Matter of the Protest of General Design and Construct, page 3 of 7
Neither party presented much evidence into the record in this protest, which makes some

of the factual conclusions and legal analysis in this case challenging. Ultimately, however, the

absence of the presentation of evidence in this case goes against the party with the burden in the

proceeding, which is Taxpayer. At hearing, Taxpayer did not present any evidence or argument

that the assessment was incorrect or about the NTTC issues identified in the protest letter. Without

presenting any argument or evidence to support the issues identified in the protest letter, Taxpayer

abandoned the NTTC argument and failed to overcome the presumption of correctness that attached

to the assessment. Because of the abandonment of this issue and the presumption of correctness of

the assessment, the merits of the underlying assessment need not be addressed further in this

decision.

Taxpayer never raised the bankruptcy issue in its protest letter, making that issue arguably

not germane at the protest hearing even under the Administrative Hearings Office’s traditional

approach of reading a protest letter broadly. See Regulation 3.1.7.12 (A) (protest limited to grounds

stated in protest letter absent an amended protest). Nevertheless, the Department was prepared to

address the legal merits of the bankruptcy issue, and in turn, the issue will be addressed here.

Under 11 U.S.C. § 727(b), generally all debts that arose before the bankruptcy discharge

order are discharged, with the exception of those provided under 11 U.S.C. § 523. Section 11 U.S.C.

§ 523 lists specific exceptions to the discharge of debt in bankruptcy. Pertinent to this case is the

exception to discharge of a tax obligation under 11 U.S.C. § 523(a)(1). Under 11 U.S.C. §

523(a)(1)(A), regardless of whether a return was filed, a tax of the type specified under 11 U.S.C. §

507(a)(8) is not dischargeable. 11 U.S.C. § 507(a)(8)(a) reads “a tax on or measured by income or

gross receipts for a taxable year…”. The provision continues to list specific time conditions,

including the date the tax return was due compared to date of petition for bankruptcy and the

In the Matter of the Protest of General Design and Construct, page 4 of 7
assessment date compared to the bankruptcy filing. Taxpayer, again who carries the burden in this

proceeding under the Tax Administration Act, made no effort to address the timeframes articulated

under 11 U.S.C. § 507(a)(8)(a) and consequently the record is devoid of sufficient information to

make a clear determination about those timelines. Since the assessment of tax in this case was

related to the collection of gross receipts tax in years ending before the unspecified date of the filing

of the petition sometime in 2013, and since Taxpayer did not present evidence related to the

timeframes under 11 U.S.C. § 507(a)(8)(a) despite carrying the burden to do so in this proceeding,

there is no basis to conclude that the gross receipts tax debt was dischargeable given 11 U.S.C. §

523(a)(1)(A) and its cross-reference to 11 U.S.C. § 507(a)(8)(a).

Additionally, not dischargeable under 11 U.S.C. § 523(a)(1)(B) is a tax debt when no return

was filed or was filed late. The age of the assessed periods, which include periods dating back

seven-years to 2009, suggests that Taxpayer was a non-filer of gross receipts tax returns under the

statute of limitations period pursuant to NMSA 1978, Section 7-1-18 (C) (2013) (the Department

has seven-years to assess a non-filer rather than the usual three-year statute of limitation to issue an

assessment). In any event, Taxpayer who carries the burden did not establish that he timely filed

CRS-1 returns during the relevant periods. As such, as In re Mallo, 774 F.3d 1313 (10th Cir. 2014)

clearly established, under 11 U.S.C. § 523(a)(1)(B), as non-filer Taxpayer’s tax liability was not

discharged by the bankruptcy discharge order. In summary, Taxpayer did not overcome the

presumption of correctness of the assessment and did not present sufficient factual and/or legal

information to establish that the tax debt was discharged by the bankruptcy order.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

jurisdiction lies over the parties and the subject matter of this protest.

In the Matter of the Protest of General Design and Construct, page 5 of 7
B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Taxpayer did not overcome the presumption of correctness on the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

D. Pursuant to 11 U.S.C. § 523(a)(1)(A) and its cross-reference to 11 U.S.C. §

507(a)(8)(a), a tax debt related to gross receipts tax is generally not dischargeable in a bankruptcy

proceeding and Taxpayer did not establish that this tax debt fell outside the timeframes addressed in

11 U.S.C. § 507(a)(8)(a).

E. Since Taxpayer did not establish it timely filed the tax returns in question before the

bankruptcy discharge, the tax debt is not dischargeable under 11 U.S.C.S 523. See Mallo v. IRS (In

re Mallo), 774 F.3d 1313 (10th Cir. 2014).

For the foregoing reasons, the Taxpayers’ protest IS DENIED As of the date of hearing,

Taxpayer owed $7,175.04 in tax, $1,435.01 in penalty, and $997.43 in interest for a total

outstanding balance of $9,607.48. Interest continues to accrue under Section 7-1-67 until tax

principal is satisfied.

DATED: June 29, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of General Design and Construct, page 6 of 7
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of General Design and Construct, page 7 of 7